Day Traders Steer Tesla Higher

Day traders are piling into Tesla stock, showing they still have lots of muscle in driving stock prices higher and lower. Jonathan Cheng joins the News Hub with a look at whether investors should cheer the move. Photo: Getty Images.

On May 9, a day after the company posted its first-ever quarterly profit, the stock exploded higher in heavy trading. Ms. Baiynd, a full-time short-term trader since 2006, pounced. From her home office in Charlotte, N.C., the 48-year-old says she scooped up shares at $67.15 and sold them on Monday for a 31% gain.

The very next day, Ms. Baiynd changed tack, she says, successfully betting Tesla would head lower on a day when the shares finished down 14% from their intraday high.

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Ms. Baiynd wasn't the only short-term trader flocking to the stock. Over a four-day period starting May 9, an average of 28.3 million Tesla shares changed hands—more than seven times the average this year. Volume surpassed even short-term trading favorite Apple Inc. on those days.

"If you're a trader, you can't not be involved in this name," says Ms. Baiynd.

The action in Tesla is the latest illustration of the power of short-term traders known as "day traders," even though some hold positions for days or even weeks before moving on. Their swarming around a small number of stocks can supercharge moves in the shares, both up and down. The whipsaw trading can complicate longer-term investors' efforts to assess companies' prospects and create volatility that draws the ire of corporate managers.

Thanks to its rally, the stock market values Tesla, which sold 4,900 cars in the first quarter, at $10.6 billion. Ford Motor Co.F-1.79%, which sold nearly 236,000 cars and light trucks in March alone, is valued at $57.6 billion.

For most of its history, Tesla has been a relatively sleepy stock. It went public in late June 2010 at $17 a share. Between July 1, 2010, and March 28 of this year, trading volume averaged 1.3 million shares a day.

Along the way, its mission to produce a commercially viable electric car attracted skepticism. In June 2009, the U.S. Department of Energy gave the company $465 million in federal loans to help launch its pricey Model S series cars, making Tesla and its chief executive, Elon Musk, a target of political broadsides. And in September 2012, the company faced a cash squeeze that forced it to sell millions of new shares.

Then, in an announcement before the start of trading April 1, Tesla surprised traders by saying it expected to report a first-quarter profit on better sales of the Model S. The stock jumped 16% that day, moving above $40 for the first time ever in heavy trading.

That move caught the eye of Glenda Pagan, a full-time day trader in Manhattan. To her, it looked like a "gap and go" stock, a situation where the stock was rallying into uncharted territory. In that scenario, she says, "the sky is the limit."

Ms. Pagan, who has been trading stocks since 2004, bought Tesla that day at $42. For the next few days it looked like a losing bet, but by mid-month Tesla was again moving higher and she added to her stake. By month-end, Ms. Pagan sold, taking profits at $47.50 and $51. "Pretty much any trade you entered, if you held it long enough, you made money," she says.

But as Ms. Pagan was buying, short sellers—who sell borrowed shares in hopes of buying them back at lower levels—were also piling in.

The percentage of Tesla shares on loan—a proxy for short-selling activity—stands at about 25% of the shares available for trading, according to data from securities-financing tracker Markit. That compares with an average of 2.3% for stocks in the Standard & Poor's 500-stock index.

One bearish case against Tesla was laid out in mid-April on SumZero, a social-networking site for hedge-fund investors. Zachary Turnage, a portfolio manager at Harbert Management Corp., a Birmingham, Ala., hedge fund, argued Tesla "will continue its history of burning cash, missing expectations and raising capital." The stock, he wrote, "was an excellent shorting opportunity" and predicted it would fall to $10 a share over the next one to two years. A spokesman for Harbert wouldn't comment on whether the firm's funds had taken a short position in Tesla.

A Tesla spokesman declined to comment on the trading activity and didn't make Mr. Musk available for comment.

With Tesla stock above $55 on Wednesday, May 8, the short sellers were feeling significant pain. Their situation got much worse when, after the closing bell, the company reported profit and revenue that topped analysts' expectations.

ENLARGE

Shares jumped 57% over the next three trading days. The next day, shares touched an intraday high of $97.12, as trading volume exploded to 37 million shares. Buying from short-sellers forced to close positions was seen fueling the gains.

After Ms. Baiynd made her successful short-term bet that Tesla shares would fall Tuesday, she is on the sidelines but still keeping a close watch on the stock.

"In terms of the ability to pick low-hanging fruit, it's probably at the top of the list," says Ms. Baiynd.

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